7 Min Read
* EU Commission sees Spanish deficit at 6 pct/GDP in 2012 -official
* EU executive also sees Spanish deficit at almost 4 pct in 2013
* Spain firm it will meet targets
* End-May deadline for Spanish regional budget seen key to 2013 goal feasibility
By Paul Taylor and Julien Toyer
BRUSSELS/MADRID May 9 (Reuters) - Spain is set to miss its deficit reduction targets this year and next unless it takes new measures, the European Commission will forecast on Friday, but Madrid insists the targets will be met, Spanish and EU officials said.
The EU's executive arm will announce on Friday its economic forecasts for the 27 countries in the European Union for this year and next, including growth, budget deficit and debt rates.
Spain's borrowing costs have soared on investor concerns that the government may have to bail out the banking sector. Madrid has promised to reduce the public deficit to 5.3 percent of gross domestic product (GDP) this year from 8.5 percent in 2011, and to 3 percent in 2013.
However, the Commission will say that unless policies change, Spain will have a budget shortfall of 6.0 percent this year and just short of 4 percent in 2013, two EU officials said.
Madrid, under intense market pressure to demonstrate its public finances are be sustainable, is adamant it will meet the targets, although no new measures are in the pipeline for now.
"The debate right now is not about relaxing the deficit path but rather how to meet our pledge (to meet deficit targets)," Spain's Prime Minister Mariano Rajoy said on Wednesday.
A Spanish government official, who asked not to be identified, said there were no plans to soften the deficit targets.
"There will be no change in the targets and we will achieve both. We'll stick to our deficit reduction path. The reforms and the budget we presented earlier this year put us on the right track," the official said.
"We have no plan to move (from the targets) and it is up to the EU, not us, to carry out the exercise of assessing these targets," the source added.
The 2012 Spanish deficit target has already been eased from the original 4.4 percent, because instead of growing 0.7 percent in 2012, as the Commission forecast last November, the Spanish economy is likely to shrink 1.7 percent.
In 2013, Spain might grow only 0.2 percent, according to its latest forecasts, while the Commission had expected a 1.4 percent growth last November.
With the euro zone as a whole expected to dip into a mild recession this year, policymakers and economists have began to emphasise the importance of reviving economic growth, rather than just austerity, if the euro zone is to win back market confidence after two years of the sovereign debt crisis.
Some policymakers in Brussels believe the 3 percent in 2013 deficit target for Spain, set in February 2010 when growth was expected at about 3 percent in 2012 and 2013, is out of reach now, although there is no official talk of softening it yet.
When the Commission releases its latest growth and deficit forecasts on Friday "we will have to look at the targets with fresh eyes", a second EU official said, cautioning that it did not mean any immediate loosening or more time for Spain.
One option, the second official said, could be to allow Spain to focus on the structural deficit, rather than the nominal figure in 2013, as Italy did with a switch to a budget balance in structural terms rather than in the headline number.
That would effectively give it an extra year to reach the headline target. But no discussion of such loosening was under way.
"The 3 percent in 2013 is their own (Spain's) target, they don't even want another year, so it is a moot point," one senior euro zone official said.
Brussels is keen to keep up the pressure for deficit reduction while the Spanish government negotiates on public spending controls with the country's autonomous regions, a major factor in last year's deficit overrun.
"We will see at the end of May, when all the budget proposals from the regions are in. Then one will be able to say if there is a realistic chance or is it going to be very, very tough," the senior euro zone official said. "Give them time until end-May."
The structural deficit measures the shortfall in the budget excluding revenue and expenditure swings due to the phase of the economic cycle, as well as one-off revenues and expenses.
Spanish forecasts show Madrid would have a structural deficit of 2.2 percent this year and 0.2 percent in 2013.
EU ministers have asked Spain to reduce its structural deficit by 1.5 percent a year on average between 2010-2013, so Madrid could be seen as being in line with EU laws if it cuts the deficit by that much.
Spain used that justification when its prime minister announced in March that the original target would not be met.
EU officials said any more leeway for Spain would have to be preceded by a detailed plan, possibly even draft budgets, showing how public finances would be controlled in 2013 and 2014, to give investors some assurance about future developments.
The Spanish official said Madrid sent the Commission detailed plans last month on how the government would implement its macroeconomic policy and meet the fiscal targets until 2015.
New details on Spain's 2013 plans are due to be published in the first half of June, the source added.
Spain announced in April it would increase Value Added Tax (VAT), as well as other indirect taxes, to raise an extra 8 billion euros in 2013.
This follows an ambitious reform of its labour market and ongoing efforts to clean up the balance sheet of its ailing banks after the bursting of a real estate bubble.
Spain would also need to finally tackle the recapitalisation of its banking sector in a convincing way, EU officials said.
Spain will demand on Friday that banks set aside another 35 billion euros ($45 billion) against loans to the ailing building sector, financial sources said, raising the possibility more public cash will be needed to rescue the country's lenders.
The government and banks are belatedly recognising a multi-billion funding gap in the financial system linked to a 2008 property crash that has heightened fears Spain may need an international bailout.
Lenders, already trying to write down 54 billion euros of losses on bad property investments, are unlikely to be able to find the extra funds without public help. Some also doubt the additional provisioning will be enough.
The demands - which another source said could be between 20 and 40 billion euros - are set to be announced after a weekly cabinet meeting on Friday and form part of a wider banking reform which will include an estimated 10 billion euro injection of public cash into troubled lender Bankia.